rbi-urged-to-cut-rates-in-september-amid-low-inflation

With inflation set to fall to its lowest level since 2004 alongside the impact of GST rationalisation and India-US trade talks back on track, a rate cut in September would be the Reserve Bank of India’s best possible option, the State Bank of India said in a report on Monday.

 

The Monetary Policy Committee (MPC) of the RBI will meet between September 29 and early October. The central bank left the policy rate unchanged at 5.50 per cent during its August meeting, following an easing cycle in the previous session.

 

Dr Soumya Kanti Ghosh, Group Chief Economic Advisor at State Bank of India (SBI), said, “We believe that the bottom of CPI inflation may not yet have been reached, and it may further decline by 65-75 basis points due to the huge GST rationalisation.

 

“Inflation will continue to remain benign even in FY27 and without a GST cut, it is tracking below 2 per cent in September and October. CPI FY27 numbers are now tracking 4 per cent or less and with the GST rationalisation, October CPI could be closer to 1.1 per cent — lowest since 2004,” Ghosh added.

 

The report cited the experience of 2019, when rate rationalisation, which largely reduced taxes on common goods from 28 per cent to 18 per cent, resulted in a decline of nearly 35 basis points in overall inflation within a couple of months.

 

It further noted that the introduction of the new CPI series is expected to bring an additional moderation of 20-30 basis points. Together, GST rationalisation and base revision suggest that CPI inflation will remain at the lower end of the RBI’s 4 per cent (+/-2 per cent) target for the whole of FY26 and FY27.

 

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According to Ghosh, there is a clear rationale for the RBI to act in September.

 

“This will, however, require calibrated communication by the RBI as post June, the bar for a rate cut is indeed higher. But there is no point in committing a Type 2 error again (no rate cut with Neutral Stance) by not cutting rates in September as inflation will continue to remain benign even in FY27.

 

Without a GST cut, it is already tracking below 2 per cent in September and October,” he stressed.